Charter Hall rebellion fizzles out

After months of sharp rhetoric, the hedge fund rebellion against the management at
Charter Hall Office REIT
ended in a fizzle rather than a bang yesterday.

As predicted the US dissidents suffered a resounding defeat, but the extraordinary general meeting was more notable for its lack of fiery exchanges than the actual outcome of the vote.

After the final results were announced, delivering a 68-32 per cent margin of victory to Charter Hall Group’s management, the trust’s independent directors shook hands with the former Macquarie Bank powerbroker, Bill Moss, who along with the three hedge funds, has launched a spate of ferocious attacks on the board over recent weeks, questioning both their judgement and their independence.

“It’s just like after a rugby match", the ex-banker quipped, smiling broadly.

Yet despite the pleasantries the REIT’s management remain uncomfortable at such a volatile share holding on the register and a number of analysts anticipate the stock price will remain subdued until the hedge funds engineer an exit.

Roger Davis, the independent chairman of the trust, said the hedge funds’ challenge has “sucked the wind out of the managemment. We’ve spent 90 per cent of our time on this so it’s a relief that it’s over."

But as Michael Scott, an equity analyst with JP Morgan, points out no-one expects the hedge funds “to just shut up and go away".

According to Mr Scott the stock price will trade around its current level of $3.34 until the US asset sale is completed and the hedge funds’ eventual exit strategy becomes clearer.

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He maintains that unit holders have benefited from the dissidents’ protests, a view shared by many in the sector.

As one analyst who spoke on condition of anonymity observed: “It’s preposterous to say this stock would be trading at where is today without the hedge funds. They stopped the sale of US assets to an in-house cousin, secured corporate governance improvements, secured lower fees and won a payout on the US asset disposal.’’

“Without the hedge funds this stock would be trading at a slightly worse discount to its peers, CPA and IOF".

David Harrison
, joint manager of Charter Hall Group, which has run the trust since acquiring the management rights from Macquarie Bank 18 months ago, insisted “investors had voted with their feet".

He said that all the institutions had backed the board while the hedge funds had failed to attract any signifcant investor support.

Mr Harrison said Charter Hall Office REIT was, at the current price, a “compelling purchase" given the upcoming distribution from the $1.9 billion US asset sale.

He said in the wake of the EGM victory, the office landlord should “rise by 10 per cent from where it trades now."

He also anticipates an uplift on Charter Hall Group’s share price, which he said has slid by 12 per cent since the meeting was called.

“I don’t think anything has fundamentally changed about our business. There has been an over-reaction to the prospects of losing the management ... but I think we’re a stock that will benefit from the recovery in the Australian market."

He also poured cold water on speculation the group would facilitate the hedge funds’ departure by snapping up part of their 19.06 per cent stake. “I don’t think it’s our role to satisfy the liquidity objectives of any investor."

Yet it remains unclear whether the hedge funds are still acting as associates since the EGM effectively terminated the contract between Orange Capital, Luxor Capital and Point Lobos Capital.

Mr Harrison described the ambiguity around the funds’ current status as “a very big legal question" but claimed he was more concerned about a mooted wind up of the $3.7 billion trust.

He questioned whether the hedge funds would actually acquire more stock to fulfull earlier pledges to petition for a wind-up of the $3.7 billion trust.

The market expects the dissidents to await the distribution from the US asset sale before flogging off their separate stakes.